26 June 2010

$4 billion of "fear" cash still out there

In late 2008 Australia nearly had a full blown bank run. The Australian newspaper's edited extract from the book "Shitstorm" details the run and is well worth a read:

"It was a silent run, unnoticed by the media. Across the country, at least tens and possibly hundreds of thousands of depositors were withdrawing their funds. Left unchecked, there would soon be queues in the street with police managing crowd control ... It's a long time since Australia has had a serious run on a financial institution, but it's all about confidence, and you cannot allow an impression to develop generally in the public that there is any risk."

The article states that there are "60 storerooms across the country with an average of about $35 million in each" plus "the Reserve Bank has its own cash stash ... understood to be in the region of $4 billion to $5 bn". This gives us a total of say $7b. Over an estimated adult (15y+) population of 17.8m that works out at only $400 per person.

The article also notes that "households pulled about $5.5bn out of their banks in the 10 weeks between US financial house Lehman Brothers going broke ... and the beginning of December ... a year later, only $1.5bn had been put back."

So there is still $4b of what I would call "fear" money out there. Now guess how long people will continue to hold this cash if faced with increased inflation while observing a strong AUD gold price? Would they not consider gold a better store of wealth in such circumstances?

Putting the $4b in perspective, it equals 87 tonnes of gold. Perth Mint refines on average say 6t per week. Now as the article says, the cash was withdrawn over 10 weeks, so you would not see instant conversion into gold. But then consider you would have at that time additional people who weren't freaked out last time starting to withdraw cash out of the banks.

Faced with that sort of local demand, the Perth Mint would be able to draw additional metal out of London, but either way in such a high/hyper inflationary environment I can see Australia's gold production being locked out of international markets for at least 3-4 months. Sorry India, sorry COMEX, we are all out.

1 comment:

And I read in the annual report that the RBA conveniently repo'ed securities of even lesser quality and for even longer durations to meet the 'need' for cash, than it had been previously. The quality of collateral and duration of loans has been deteriorating for years.

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